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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File Number: 001-32968

 

 

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia     54-2053718

(State or other jurisdiction of

incorporation or organization)

    (I.R.S. Employer Identification No.)
999 Waterside Drive, Suite 200, Norfolk, Virginia   23510
(Address of principal executive offices)   (Zip Code)

(757) 217-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s common stock as of April 30, 2011 was 33,389,949 shares, par value $0.01.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PART I – FINANCIAL INFORMATION

  

ITEM 1 – FINANCIAL STATEMENTS

  

Consolidated Balance Sheets

     3   

March 31, 2011

  

December 31, 2010

  

Consolidated Statements of Operations

     4   

Three months ended March 31, 2011 and 2010

  

Consolidated Statement of Changes in Shareholders’ Equity

     5   

Three months ended March 31, 2011

  

Consolidated Statements of Cash Flows

     6   

Three months ended March 31, 2011 and 2010

  

Notes to Consolidated Financial Statements

     8   

ITEM  2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     34   

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     46   

ITEM 4 – CONTROLS AND PROCEDURES

     47   

PART II – OTHER INFORMATION

  

ITEM 1 – LEGAL PROCEEDINGS

     48   

ITEM 1A – RISK FACTORS

     48   

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     53   

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

     53   

ITEM 4 – REMOVED AND RESERVED

     53   

ITEM 5 – OTHER INFORMATION

     53   

ITEM 6 – EXHIBITS

     53   

SIGNATURES

     55   

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

ITEM I. Financial Statements

CONSOLIDATED BALANCE SHEETS

 

    (Unaudited)        
(in thousands, except share and per share data)   March 31, 2011     December 31, 2010  

Assets:

   

Cash and due from banks

  $ 18,921      $ 17,726   

Interest-bearing deposits in other banks

    1,786        2,342   

Overnight funds sold and due from Federal Reserve Bank

    352,070        440,844   

Investment securities available for sale, at fair value

    349,258        334,237   

Restricted equity securities, at cost

    24,009        24,363   

Loans held for sale

    12,161        22,499   

Loans

    1,806,447        1,958,767   

Allowance for loan losses

    (109,990     (157,253
               

Net loans

    1,696,457        1,801,514   

Premises and equipment, net

    92,533        93,414   

Interest receivable

    7,540        7,278   

Foreclosed real estate and repossessed assets, net of valuation allowance

    70,790        59,423   

Intangible assets, net

    10,371        10,858   

Bank-owned life insurance

    50,693        50,213   

Other assets

    30,794        35,445   
               

Totals assets

  $ 2,717,383      $ 2,900,156   
               

Liabilities and Shareholders’ Equity:

   

Deposits

   

Noninterest-bearing demand

  $ 223,764      $ 224,440   

Interest-bearing:

   

Demand

    646,902        725,816   

Savings

    67,902        65,620   

Time deposits:

   

Less than $100

    679,975        703,006   

$100 or more

    652,459        701,279   
               

Total deposits

    2,271,002        2,420,161   

Federal Home Loan Bank borrowings

    212,559        213,353   

Other borrowings

    50,003        49,853   

Interest payable

    3,729        3,644   

Other liabilities

    20,227        22,350   
               

Total liabilities

    2,557,520        2,709,361   
               

Commitments and contingencies

   

Shareholders’ equity:

   

Preferred stock, no par value; 1,000,000 shares authorized; none issued and outstanding

    —          —     

Common stock, $0.01 par value; 1,000,000,000 shares authorized; 33,389,949 shares issued and outstanding on March 31, 2011 and on December 31, 2010 (1)

    334        334   

Capital surplus

    477,415        477,385   

Retained deficit

    (319,349     (287,681

Accumulated other comprehensive income, net of tax

    1,434        345   
               

Total shareholders’ equity before non-controlling interest

    159,834        190,383   

Non-controlling interest

    29        412   
               

Total shareholders’ equity

    159,863        190,795   
               

Total liabilities and shareholders’ equity

  $ 2,717,383      $ 2,900,156   
               

See accompanying notes to the consolidated financial statements.

 

(1)

As restated to give retroactive effect to the 1 for 25 shares reserve stock split which occurred on April 27, 2011.

 

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HAMPTON ROADS BANKSHARES, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except share and per share data)    Three Months Ended  
           As Restated  
(unaudited)    March 31, 2011     March 31, 2010  

Interest Income:

    

Loans, including fees

   $ 24,539      $ 32,254   

Investment securities

     2,418        1,717   

Overnight funds sold

     225        95   

Interest-bearing deposits in other banks

     1        29   
                

Total interest income

     27,183        34,095   
                

Interest Expense:

    

Deposits:

    

Demand

     1,165        3,801   

Savings

     42        129   

Time deposits:

    

Less than $100

     2,904        3,950   

$100 or more

     2,787        2,238   
                

Interest on deposits

     6,898        10,118   

Federal Home Loan Bank borrowings

     1,320        1,313   

Other borrowings

     741        731   
                

Total interest expense

     8,959        12,162   
                

Net interest income

     18,224        21,933   

Provision for loan losses

     21,314        45,613   
                

Net interest expense after provision for loan losses

     (3,090     (23,680
                

Noninterest Income:

    

Service charges on deposit accounts

     1,446        1,665   

Mortgage banking revenue

     1,250        1,755   

Gain on sale of investment securities available for sale

     —          79   

Gain on sale of premises and equipment

     —          25   

Losses on foreclosed real estate and repossessed assets

     (3,682     (738

Other-than-temporary impairment of securities (includes total other-than-temporary impairment losses of $0 and $234, net of $0 and $190 recognized in other comprehensive income for the three months ended March 31, 2011 and 2010, respectively, before taxes)

     —          (44

Insurance revenue

     1,153        1,320   

Brokerage revenue

     70        74   

Income from bank-owned life insurance

     481        400   

Other

     1,407        1,065   
                

Total noninterest income

     2,125        5,601   
                

Noninterest Expense:

    

Salaries and employee benefits

     12,355        9,750   

FDIC insurance

     6,709        1,056   

Occupancy

     2,326        2,298   

Professional fees and consultants

     2,185        1,316   

Problem loan and repossessed asset costs

     1,416        613   

Data processing

     1,007        1,480   

Equipment

     806        1,091   

Other

     3,838        3,376   
                

Total noninterest expense

     30,642        20,980   
                

Loss before provision for income taxes

     (31,607     (39,059

Provision for income taxes

     44        62   
                

Net loss

     (31,651     (39,121

Net income attributable to non-controlling interest

     17        —     
                

Net loss attributable to Hampton Roads Bankshares, Inc.

     (31,668     (39,121

Preferred stock dividend and accretion of discount

     —          1,375   
                

Net loss available to common shareholders

   $ (31,668   $ (40,496
                

 

Per Share: (1)

    

Cash dividends declared

   $ —        $ —     
                

Basic loss

   $ (0.95   $ (45.74
                

Diluted loss

   $ (0.95   $ (45.74
                

Basic weighted average shares outstanding

     33,389,949        885,344   

Effect of dilutive stock options

     —          —     
                

Diluted weighted average shares outstanding

     33,389,949        885,344   
                

See accompanying notes to the consolidated financial statements.

 

(1)

As restated to give retroactive effect to the 1 for 25 shares reserve stock split which occurred on April 27, 2011.

 

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HAMPTON ROADS BANKSHARES, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(in thousands, except share data)    Common Stock             Retained     Non-controlling     Accumulated
Other
Comprehensive
     Total
Shareholders’
 
(unaudited)    Shares      Amount      Capital Surplus      Deficit     Interest     Income (Loss)      Equity  

Balance at December 31, 2010 (1)

     33,389,949       $ 334       $ 477,385       $ (287,681   $ 412      $ 345       $ 190,795   

Comprehensive income:

                  

Net loss

     —           —           —           (31,668     17        —           (31,651

Change in unrealized gain on securities available for sale

     —           —           —           —          —          1,089         1,089   
                        

Total comprehensive loss

                     (30,562

Stock-based compensation expense

     —           —           30         —          —          —           30   

Distributed non-controlling interest

     —           —           —           —          (400     —           (400
                                                            

Balance at March 31, 2011

     33,389,949       $ 334       $ 477,415       $ (319,349   $ 29      $ 1,434       $ 159,863   
                                                            

See accompanying notes to the consolidated financial statements.

 

(1)

As restated to give retroactive effect to the 1 for 25 shares reverse stock split which occurred on April 27, 2011.

 

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HAMPTON ROADS BANKSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)    Three Months Ended  
           As Restated  
(unaudited)    March 31, 2011     March 31, 2010  

Operating Activities:

    

Net loss

   $ (31,651   $ (39,121

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     1,171        1,333   

Amortization of intangible assets and fair value adjustments

     (33     (4

Provision for loan losses

     21,314        45,613   

Proceeds from mortgage loans held for sale

     101,900        63,232   

Originations of mortgage loans held for sale

     (91,562     (66,534

Stock-based compensation expense

     30        111   

Net amortization of premiums and accretion of discounts on investment securities

     711        316   

Gain on sale of premises and equipment

     —          (25

Losses on foreclosed real estate and repossessed assets

     3,682        738   

Gain on sale of investment securities available for sale

     —          (79

Earnings on bank-owned life insurance

     (481     (400

Other-than-temporary impairment of securities

     —          44   

Changes in deferred taxes

     —          (235

Changes in:

    

Interest receivable

     (262     (683

Other assets

     4,652        1,097   

Interest payable

     85        (69

Other liabilities

     (2,123     (3,812
                

Net cash provided by operating activities

     7,433        1,522   
                

Investing Activities:

    

Proceeds from maturities and calls of debt securities available for sale

     14,242        5,540   

Proceeds from sale of investment securities available for sale

     —          767   

Purchase of investment securities available for sale

     (28,887     (22,591

Proceeds from sale of restricted equity securities

     354        —     

Net decrease in loans

     59,341        30,555   

Purchase of premises and equipment

     (260     (97

Proceeds from sale of foreclosed real estate

     9,127        1,120   

Proceeds from sale of premises and equipment

     —          34   
                

Net cash provided by investing activities

     53,917        15,328   
                

Financing Activities:

    

Net increase (decrease) in deposits

     (149,069     70,374   

Repayments of Federal Home Loan Bank borrowings

     (16     (1,516

Distributed non-controlling interest

     (400     —     

Preferred stock dividends paid and amortization of preferred stock discount

     —          270   
                

Net cash provided by (used in) financing activities

     (149,485     69,128   
                

Increase (decrease) in cash and cash equivalents

     (88,135     85,978   

Cash and cash equivalents at beginning of period

     460,912        200,044   
                

Cash and cash equivalents at end of period

   $ 372,777      $ 286,022   
                

 

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HAMPTON ROADS BANKSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended  
     March 31, 2011      March 31, 2010  

Supplemental cash flow information:

     

Cash paid for interest

   $ 8,874       $ 12,232   

Cash paid for income taxes

     20         —     

Supplemental non-cash information:

     

Change in unrealized gain on securities

   $ 1,089       $ 1,837   

Transfer between loans and other real estate owned

     24,176         18,277   

See accompanying notes to the consolidated financial statements.

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010. On September 28, 2010, the holders of the Company’s common stock, par value $0.01 per share (the “Common Stock”), approved an amendment to the Company’s Amended and Restated Articles of Incorporation (the “Articles”) to effect a reverse stock split of the Common Stock. The shareholders granted the Company’s Board of Directors the discretion to determine the appropriate timing and ratio of the reverse stock split.

On March 18, 2011, the Board of Directors of the Company unanimously adopted resolutions approving an amendment to the Articles to effect a 1-for-25 reverse stock split of all outstanding shares of the Common Stock, effective at 11:59 p.m., Eastern Daylight Time, on April 27, 2011 (the “Reverse Stock Split”). Shareholders received one new share of Common Stock in replacement of every twenty-five shares they held on that date. The Reverse Stock Split did not change the aggregate value of any stockholder’s shares of Common Stock or any stockholder’s ownership percentage of the Common Stock, except for minimal changes resulting from the treatment of fractional shares. The Company did not issue any fractional shares as a result of the Reverse Stock Split. The number of shares issued to each stockholder was rounded up to the nearest whole number if, as a result of the Reverse Stock Split, the number of shares owned by any stockholder would not be a whole number. All previously reported share and per share amounts in the accompanying consolidated financial statements and related notes have been restated to reflect the reverse stock split.

Recent Accounting Pronouncements

In January 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-01, Receivables, that temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, until the guidance for determining what constitutes a troubled debt restructuring is determined. The guidance is anticipated to be effective for interim and annual periods after June 15, 2011. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements but will likely result in additional disclosures.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310), that defines Troubled Debt Restructurings. In turn, the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, is effective for interim and annual periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements but will likely result in additional disclosures.

NOTE B – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to filing the Company’s quarterly report on Form 10-Q for the three months ended March 31, 2010, the Company determined that a valuation allowance on its deferred tax assets should be recognized as of December 31, 2009. The Company decided to establish a valuation allowance against the deferred tax asset because it is uncertain when it will realize this asset.

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accordingly, the March 31, 2010 consolidated financial statements were restated to account for this determination. The effect of this change (in thousands, except per share amounts) in the consolidated financial statements was as follows.

 

Consolidated Balance Sheet at March 31, 2010

  

     As Reported     Adjustment     As Restated  

Deferred tax assets, net

   $ 70,323      $ (70,323   $ —     

Total assets

     3,016,470        (70,323     2,946,147   

Retained earnings deficit

     (158,621     (70,323     (228,944

Total shareholders’ equity

     156,509        (70,323     86,186   

Total liabilities and shareholders’ equity

     3,016,470        (70,323     2,946,147   

Consolidated Statement of Operations for the three months ended March 31, 2010

  

     As Reported     Adjustment     As Restated  

Provision for income taxes

   $ (14,279   $ 14,341      $ 62   

Net loss

     (24,780     (14,341     (39,121

Net loss available to common shareholders

     (26,155     (14,341     (40,496

Loss per share - basic

     (29.54     (16.20     (45.74

Loss per share - diluted

     (29.54     (16.20     (45.74

Consolidated Statement of Cash Flows for the three months ended March 31, 2010

  

     As Reported     Adjustment     As Restated  

Operating Activities:

      

Net loss

   $ (24,780   $ (14,341   $ (39,121

Deferred tax asset valuation allowance

     —          14,341        14,341   

NOTE C – REGULATORY MATTERS

Effective June 17, 2010, the Company and its banking subsidiary, Bank of Hampton Roads (“BOHR”), entered into a written agreement (herein called the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”). The Company’s other banking subsidiary, Shore Bank (“Shore”), is not a party to the Written Agreement.

Written Agreement

Under the terms of the Written Agreement, BOHR agreed to develop and submit for approval, within the time periods specified, plans to (a) strengthen board oversight of management and BOHR’s operations, (b) strengthen credit risk management policies, (c) improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million which are now, or may in the future become, past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR, (d) review and revise, as

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan and lease losses, (e) improve management of BOHR’s liquidity position and funds management policies, (f) provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario, (g) reduce BOHR’s reliance on brokered deposits, and (h) improve BOHR’s earnings and overall condition.

In addition, BOHR has agreed that it will (a) not extend, renew, or restructure any credit that has been criticized by the FRB or the Bureau of Financial Institutions absent prior board of directors approval in accordance with the restrictions in the Written Agreement, (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB, (c) comply with legal and regulatory limitations on indemnification payments and severance payments, and (d) appoint a committee to monitor compliance with the terms of the Written Agreement.

In addition, the Company has agreed that it will (a) not take any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval, (b) take all necessary steps to correct certain technical violations of law and regulation cited by the FRB, (c) refrain from guaranteeing any debt without the prior written approval of the FRB and the Bureau of Financial Institutions, and (d) refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB or the Bureau of Financial Institutions.

Under the terms of the Written Agreement, both the Company and BOHR agreed to submit for approval capital plans to maintain sufficient capital at the Company, on a consolidated basis, and to refrain from declaring or paying dividends absent prior regulatory approval.

To date, the Company and BOHR have met all of the deadlines for taking actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. A committee (the “Risk Committee”) has been appointed to oversee the Company’s compliance with the terms of the agreement and has met each month to review compliance. Written plans have been submitted for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations. The Company has also submitted its written policies and procedures for maintaining an adequate allowance for loan and lease losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million. Additionally, the Company instituted the required review process for all classified loans. The Company has charged off the assets identified as loss from the previous examination. Moreover, the Company raised $295.0 million in the closings of several related transactions in the third and fourth quarters of last year. The Company and BOHR were “well capitalized” as of March 31, 2011. As a result, management believes the Company and BOHR are in full compliance with the terms of the Written Agreement.

NOTE D – STOCK-BASED COMPENSATION

Compensation cost relating to stock-based transactions is accounted for in the consolidated financial statements based on the fair value of the share-based award on the date of grant. The Company calculates the fair value of its stock options at the date of grant using a lattice option pricing model. Stock options granted with pro-rata vesting schedules are expensed over the vesting period on a straight-line basis.

Stock-based compensation expense (in thousands, except share data) recognized in the consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the three months ended March 31, 2011 and 2010 were as follows.

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     March 31,  
     2011      2010  

Expense recognized:

     

Related to stock options

   $ 22       $ 31   

Related to share awards

     8         80   

Related tax benefit

     —           —     

Number of options exercised:

     

New shares

     —           —     

Previously acquired shares

     —           —     

Total intrinsic value of options exercised

   $ —         $ —     

Cash received from options exercised

     —           —     

The Company has granted stock options to its directors and employees under stock compensation plans that have been approved by the Company’s shareholders. All outstanding options have terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over periods that range from three to ten years. A summary of the Company’s stock option activity and related information for the three months ended March 31, 2011 is as follows.

 

           Weighted      Average  
     Options     Average      Intrinsic  
     Outstanding     Exercise Price      Value  

Balance at December 31, 2010

     46,853      $ 326.00         —     

Expired

     (1,664     223.96         —     
                         

Balance at March 31, 2011

     45,189      $ 329.82       $ —     
                         

Options exercisable at March 31, 2011

     43,712      $ 326.17       $ —     
                         

Information pertaining to options outstanding and options exercisable as of March 31, 2011 is as follows.

 

    Options Oustanding     Options Exercisable  
Ranges of
Exercise
Prices
  Number of Options
Outstanding
    Weighted
Average Remaining
Contractual

Life
    Weighted Average
Exercise Price
    Number of Options
Exercisable
    Weighted Average
Exercise Price
 
$77.25 - $126.25     2,110        1.47      $ 103.89        2,110      $ 103.89   
$175.75 - $219.25     6,433        2.04        197.39        6,433        197.39   
$227.75 - $266.25     14,511        2.56        243.57        14,511        243.57   
$300.00 - $312.25     6,865        5.83        300.88        6,225        300.97   
$485.75 - $551.75     13,722        3.95        500.55        12,885        497.79   
$591.75 - $616.75     1,548        4.24        611.49        1,548        611.49   
                                         
$77.25 - $616.75     45,189        3.41      $ 329.82        43,712      $ 326.17   
                                         

The Company may issue new shares to satisfy stock option grants. As of March 31, 2011, there were 30,136 shares available under the existing stock incentive plans. Shares may be repurchased in the open market or, under certain circumstances, through privately negotiated transactions. As of March 31, 2011, there was $173 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 3.3 years.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has granted non-vested shares of Common Stock to certain directors and employees as part of incentive programs. Outstanding non-vested shares have vesting schedules of five years and are expensed over the same time frame. A summary of the Company’s non-vested share activity and related information for the three months ended March 31, 2011 is as follows.

 

     Number of
Shares
    Per Share
Weighted-Average
Grant-Date

Fair Value
 

Balance at December 31, 2010

     320      $ 262.75   

Vested

     (40     219.25   
                

Balance at March 31, 2011

     280      $ 268.96   
                

As of March 31, 2011, there was $64 thousand of total unrecognized compensation cost related to non-vested share awards. That cost is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of shares vested during the three months ended March 31, 2011 was $690.

NOTE E – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities (in thousands) available for sale at March 31, 2011 and December 31, 2010 were as follows.

 

     March 31, 2011  

Description of Securities

   Amortized
Cost
     Gross Unrealized
Gains
     Gross Unrealized
Losses
     Estimated
Fair Value
 

Agency securities

   $ 95,371       $ 482       $ 1,361       $ 94,492   

Mortgage-backed securities

     250,286         3,571         1,247         252,610   

Equity securities

     2,112         90         46         2,156   
                                   

Total investment securities available for sale

   $ 347,769       $ 4,143       $ 2,654       $ 349,258   
                                   
     December 31, 2010  

Description of Securities

   Amortized
Cost
     Gross Unrealized
Gains
     Gross Unrealized
Losses
     Estimated
Fair Value
 

Agency securities

   $ 89,849       $ 371       $ 1,518       $ 88,702   

Mortgage-backed securities

     241,970         3,115         1,737         243,348   

Equity securities

     2,101         127         41         2,187   
                                   

Total investment securities available for sale

   $ 333,920       $ 3,613       $ 3,296       $ 334,237   
                                   

The amortized cost and estimated fair value of investment securities available for sale (in thousands) that are not determined to be other-than-temporarily impaired by contractual maturity at March 31, 2011 and December 31, 2010 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities do not have contractual maturities.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     March 31, 2011  
     Amortized Cost      Estimated Fair Value  

Due after one year but less than five years

   $ 4,798       $ 4,994   

Due after five years but less than ten years

     41,289         40,790   

Due after ten years

     299,570         301,318   

Equity securities

     2,112         2,156   
                 

Total available-for-sale securities

   $ 347,769       $ 349,258   
                 
     December 31, 2010  
     Amortized Cost      Estimated Fair Value  

Due after one year but less than five years

   $ 5,670       $ 5,884   

Due after five years but less than ten years

     35,222         34,688   

Due after ten years

     290,927         291,478   

Equity securities

     2,101         2,187   
                 

Total available-for-sale securities

   $ 333,920       $ 334,237   
                 

Information pertaining to securities with gross unrealized losses (in thousands) at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position is as follows.

 

     March 31, 2011  
     Less than 12 Months      12 Months or More      Total  

Description of Securities

   Estimated
Fair Value
     Unrealized
Loss
     Estimated
Fair Value
     Unrealized
Loss
     Estimated
Fair Value
     Unrealized
Loss
 

Agency securities

   $ 54,336       $ 1,361       $ —         $ —         $ 54,336       $ 1,361   

Mortgage-backed securities

     78,823         1,247         —           —           78,823         1,247   

Equity securities

     53         4         91         42         144         46   
                                                     
   $ 133,212       $ 2,612       $ 91       $ 42       $ 133,303       $ 2,654   
                                                     
     December 31, 2010  
     Less than 12 Months      12 Months or More      Total  

Description of Securities

   Estimated
Fair Value
     Unrealized
Loss
     Estimated
Fair Value
     Unrealized
Loss
     Estimated
Fair Value
     Unrealized
Loss
 

Agency securities

   $ 4,758       $ 1,518       $ —         $ —         $ 4,758       $ 1,518   

Mortgage-backed securities

     71,057         1,737         —           —           71,057         1,737   

Equity securities

     121         1         93         40         214         41   
                                                     
   $ 75,936       $ 3,256       $ 93       $ 40       $ 76,029       $ 3,296   
                                                     

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or is it more likely than not that it will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss. If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The unrealized loss positions on debt securities at March 31, 2011 were considered to be directly related to interest rate movements as there is minimal credit risk exposure in these investments. At March 31, 2011, 25 mortgage-backed and 14 agency securities were in an unrealized loss position. Management does not believe that these debt securities were other-than-temporarily impaired at March 31, 2011.

Our impairment analysis considered all available evidence including the length of time and the extent to which the market value of each security was less than cost, the financial condition of the issuer of each equity security (based upon financial statements of the issuers), and the near term prospects of each issuer, as well as our intent and ability to retain these investments for a sufficient period of time to allow for any anticipated recovery in their respective market values. During the first three months of 2011, no securities were determined to be other-than-temporarily impaired. During the first three months of 2010, equity securities with an amortized cost basis of $91 thousand were determined to be other-than-temporarily impaired. Impairment losses of $44 thousand were recognized through noninterest income during the first three months of 2010. An additional $190 thousand was included in accumulated other comprehensive loss in the equity section of the balance sheet as of March 31, 2010. Management has evaluated the unrealized losses associated with the remaining equity securities as of March 31, 2011 and, in management’s opinion, the unrealized losses are temporary, and it is our intention to hold these securities until their value recovers. A rollforward of the cumulative other-than-temporary impairment losses (in thousands) recognized in earnings for all securities for the three months ended March 31, 2011 is as follows.

 

December 31, 2010

   $ 719   

Less: Realized gains for securities sales

     —     

Add: Loss where impairment was not previously recognized

     —     

Add: Loss where impairment was previously recognized

     —     
        

March 31, 2011

   $ 719   
        

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $17.6 million at March 31, 2011. FHLB stock is generally viewed as a long-term investment. As a restricted investment security, it is carried at cost as there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The FHLB has reinstated dividends and the repurchase of its stock thereby improving the value. The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2011, and no impairment has been recognized.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE F – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

Acquired loans are recorded at fair value at time of acquisition with no valuation allowance. Accreted yield is limited to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments.

Loans that were acquired for which there was evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be made as scheduled had an outstanding balance of $18.4 million and a carrying amount of $16.3 million at March 31, 2011. The carrying amount of these loans is included in the balance sheet amount of loans receivable at March 31, 2011. Of these loans, $11.1 million have experienced further deterioration since the acquisition date and are included in the impaired loan amounts disclosed in Note G, Loans. The following table depicts the accretable yield (in thousands) at the beginning and end of the period.

 

     Accretable
Yield
 

Balance, December 31, 2010

   $ 549   

Accretion

     (55

Disposals

     (11

Additions

     1   
        

Balance, March 31, 2011

   $ 484   
        

NOTE G - LOANS

The Company grants commercial, real estate, and consumer loans to customers throughout its lending areas and historically granted new loans to finance construction and land development. The major segments of loans (in thousands) are summarized as follows.

 

     March 31, 2011     December 31, 2010  

Commercial and Industrial

   $ 270,682      $ 304,550   

Construction

     395,228        475,284   

Real estate - commercial mortgage

     630,403        658,969   

Real estate - residential mortgage

     472,042        487,559   

Installment loans

     38,239        32,708   

Deferred loan fees and related costs

     (147     (303
                

Total loans

   $ 1,806,447      $ 1,958,767   
                

Allowance for Loan Losses Related to Loans

The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio. Management considers several factors in determining the allowance for loan losses, including historical loan loss experience, the size and composition of the portfolio, and the estimated value of collateral agreements. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations (primarily third-party agreements), cash flow analyses of borrowers, and risk ratings of loans. In addition to the review of credit quality through ongoing credit review processes, we perform a comprehensive allowance analysis for our loan portfolio at least quarterly. This

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

analysis includes specific allowances for individual loans, general allowances for loan pools which factor in our historical loan loss experience, loan portfolio growth and trends, economic conditions, and unallocated allowances predicated upon both internal and external factors.

As part of the loan loss reserve methodology, loans are categorized into one of five broad segments: commercial, construction, commercial real estate, residential real estate, and consumer installment. Loss factors are calculated using qualitative data and then are applied to each of the loan segments to determine a reserve level for various subsets of each of the five segments of loans. In addition, special allocations may be assigned to nonaccrual or other problem credits.

A rollforward of the activity (in thousands) within the allowance for loan losses by loan type and recorded investment in loans for the quarter ended March 31, 2011 is as follows.

 

     Commercial
and Industrial
    Construction     Real Estate -     Installment     Unallocated     Total  
         Commercial
Mortgage
    Residential
Mortgage
       

Allowance for credit losses:

              

Beginning balance

   $ 18,610      $ 83,052      $ 25,426      $ 17,973      $ 3,400      $ 8,792      $ 157,253   

Charge-offs

     (9,059     (46,190     (7,232     (5,994     (676       (69,151

Recoveries

     327        53        60        57        77          574   

Provision

     4,206        7,144        6,537        5,007        385        (1,965     21,314   
                                                        

Ending balance

   $ 14,084      $ 44,059      $ 24,791      $ 17,043      $ 3,186      $ 6,827      $ 109,990   
                                                        

Ending balance: collectively evaluated for impairment

   $ 8,064      $ 16,385      $ 15,459      $ 8,519      $ 2,782      $ 6,827      $ 58,036   
                                                        

Ending balance: individually evaluated for impairment

   $ 5,809      $ 24,591      $ 8,929      $ 8,315      $ 399        $ 48,043   
                                                  

Ending balance: loans acquired with deteriorated credited quality

   $ 211      $ 3,083      $ 403      $ 209      $ 5        $ 3,911   
                                                  

Transactions (in thousands) affecting the allowance for loan losses during the three months ended March 31, 2010 were as follows.

 

     2010  

Balance at beginning of period

   $ 132,697   

Provision for loan losses

     45,613   

Loans charged off

     (28,119

Recoveries

     1,035   
        

Balance at end of period

   $ 151,226   
        

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Impaired Loans

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral. Management considers a loan to be collateral dependent when repayment of the loan is expected solely from the sale or liquidation of the underlying collateral. The Company’s policy is to charge off collateral dependent impaired loans at the time of foreclosure, repossession, or liquidation or at such time any portion of the loan is deemed to be uncollectible and in no case later than 180 days in nonaccrual status. The Company will reduce the carrying value of the loan to the estimated fair value of the collateral less estimated selling costs through a charge off to the allowance for loan losses. For loans that are not collateral dependent, impairment is measured using discounted cash flows. Total impaired loans were $303.2 million and $356.9 million at March 31, 2011 and December 31, 2010, respectively, the majority of which were considered collateral dependent, and therefore, measured at the fair value of the underlying collateral.

Impaired loans for which no allowance is provided totaled $88.6 million and $107.3 million at March 31, 2011 and December 31, 2010, respectively. Loans written down to their estimated fair value of collateral less the costs to sell account for $20.0 million of the impaired loans for which no allowance has been provided as of March 31, 2011 and December 31, 2010. The average age of appraisals for these loans is 0.57 years at March 31, 2011. The remaining impaired loans for which no allowance is provided are fully covered by the value of the collateral, and therefore, no loss is expected on these loans.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following charts show impaired loans (in thousands) by class as of March 31, 2011 and December 31, 2010.

 

March 31, 2011    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial & Industrial

   $ 11,799       $ 15,103       $ —         $ 15,022       $ 59   

Construction

              

1-4 family residential construction

     2,595         2,633         —           2,637         —     

Commercial construction

     22,814         51,848         —           61,715         155   

Real estate

              

Commercial Mortgage

              

Owner occupied

     23,521         24,445         —           24,688         352   

Non-owner occupied

     13,410         28,516         —           28,707         —     

Residential Mortgage

              

Secured by 1-4 family, 1st lien

     12,496         13,683         —           13,916         101   

Secured by 1-4 family, junior lien

     1,979         3,040         —           3,242         6   

Installment

     38         64         —           66         1   

With an allowance recorded:

              

Commercial & Industrial

     16,717         18,656         6,239         27,133         171   

Construction

              

1-4 family residential construction

     5,836         8,380         1,068         8,406         10   

Commercial construction

     105,702         160,929         26,286         186,336         696   

Real estate

              

Commercial Mortgage

              

Owner occupied

     27,568         28,299         6,435         27,856         220   

Non-owner occupied

     28,329         31,094         3,159         34,557         330   

Residential Mortgage

              

Secured by 1-4 family, 1st lien

     23,605         25,075         4,674         25,238         217   

Secured by 1-4 family, junior lien

     6,229         7,598         3,673         7,668         39   

Installment

     587         633         420         634         0   

Total:

              

Commercial & Industrial

     28,516         33,759         6,239         42,155         230   

Construction

     136,947         223,790         27,354         259,094         861   

Real estate-commercial mortgage

     92,828         112,354         9,594         115,808         902   

Real estate-residential mortgage

     44,309         49,396         8,347         50,064         363   

Installment

     625         697         420         700         1   

Total

     303,225         419,996         51,954         467,821         2,357   

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2010    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial & Industrial

   $ 12,453       $ 16,397       $ —         $ 15,086       $ 176   

Construction

              

1-4 family residential construction

     5,373         6,137         —           6,930         10   

Commercial construction

     36,792         62,020         —           43,289         329   

Real estate

              

Commercial Mortgage

              

Owner occupied

     10,195         10,752         —           11,574         491   

Non-owner occupied

     20,866         34,830         —           26,019         126   

Residential Mortgage

              

Secured by 1-4 family, 1st lien

     17,266         19,445         —           22,235         211   

Secured by 1-4 family, junior lien

     4,259         5,044         —           5,338         5   

Installment

     93         116         —           192         —     

With an allowance recorded:

              

Commercial & Industrial

     19,141         21,902         8,852         21,724         171   

Construction

              

1-4 family residential construction

     5,693         7,121         1,130         1,998         118   

Commercial construction

     133,429         152,938         57,392         155,562         1,491   

Real estate

              

Commercial Mortgage

              

Owner occupied

     19,324         20,206         4,411         23,057         559   

Non-owner occupied

     40,272         56,692         7,248         47,213         1,229   

Residential Mortgage

              

Secured by 1-4 family, 1st lien

     25,071         25,596         6,660         29,365         405   

Secured by 1-4 family, junior lien

     4,463         4,886         3,072         5,143         37   

Installment

     2,186         3,881         1,073         3,871         —     

Total:

              

Commercial & Industrial

     31,594         38,299         8,852         36,810         347   

Construction

     181,287         228,216         58,522         207,779         1,948   

Real estate-commercial mortgage

     90,657         122,480         11,659         107,863         2,405   

Real estate-residential mortgage

     51,059         54,971         9,732         62,081         658   

Installment

     2,279         3,997         1,073         4,063         —     

Total

     356,876         447,963         89,838         418,596         5,358   

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Non-performing Assets

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and foreclosed real estate and repossessed assets. Total non-performing assets were $269.3 million or 10% of total assets at March 31, 2011 compared with $315.4 million or 11% of total assets at December 31, 2010. Non-performing assets (in thousands) were as follows.

 

     March 31, 2011      December 31, 2010  

Loans 90 days past due and still accruing interest

   $ 770       $ —     

Nonaccrual loans, including nonaccrual impaired loans

     197,708         255,992   

Foreclosed real estate and repossessed assets

     70,790         59,423   
                 

Non-performing assets

   $ 269,268       $ 315,415   
                 

Nonaccrual and Past Due Loans

A reconciliation of non-performing loans to impaired loans (in thousands) for the quarter ended March 31, 2011 and December 31, 2010 is as follows.

 

     March 31, 2011      December 31, 2010  

Loans 90 days past due and still accruing interest

   $ 770       $ —     

Nonaccrual loans, including nonaccrual impaired loans

     197,708         255,992   
                 

Total non-performing loans

     198,478         255,992   

TDRs on accrual

     34,457         63,932   

Impaired loans on accrual

     70,290         36,952   
                 

Total impaired loans

   $ 303,225       $ 356,876   
                 

Nonaccrual loans were $197.7 million at March 31, 2011 compared to $256.0 million at December 31, 2010. As a general rule, loans are placed in nonaccrual status when principal or interest is 90 days or more past due. If income on nonaccrual loans had been recorded under original terms, $7.7 million of additional interest income would have been recorded for the three months ended March 31, 2011.

An age analysis of past due loans as of March 31, 2011 and December 31, 2010 is as follows.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

March 31, 2011    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than
90 Days
     Total
Past Due
     Current     Total
Loans
    Recorded
Investment
>90 Days and
Accruing
 

Commercial & Industrial

   $ 1,890       $ 34       $ 15,348       $ 17,272       $ 253,410      $ 270,682      $ —     

Construction

                  

1-4 family residential construction

     698         1,527         8,150         10,375         30,710        41,085        —     

Commercial construction

     10,738         642         101,788         113,168         240,975        354,143        —     

Real estate

                  

Commercial Mortgage

                  

Owner occupied

     1,537         1,284         18,967         21,788         314,130        335,918        —     

Non-owner occupied

     1,111         5,556         19,556         26,223         268,262        294,485        —     

Residential Mortgage

                  

Secured by 1-4 family, 1st lien

     6,132         959         26,577         33,668         232,991        266,659        770   

Secured by 1-4 family, junior lien

     623         400         7,516         8,539         196,844        205,383        —     

Installment

     84         10         576         670         37,569        38,239        —     

Deferred loan fees and related costs

     —           —           —           —           (147     (147     —     
                                                            

Total

   $ 22,813       $ 10,412       $ 198,478       $ 231,703       $ 1,574,744      $ 1,806,447      $ 770   
                                                            
December 31, 2010    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than
90 Days
     Total
Past Due
     Current     Total
Loans
    Recorded
Investment
>90 Days and
Accruing
 

Commercial & Industrial

   $ 2,061       $ 683       $ 25,346       $ 28,090       $ 276,460      $ 304,550      $ —     

Construction

                  

1-4 family residential construction

     —           —           7,273         7,273         27,477        34,750        —     

Commercial construction

     6,615         321         132,395         139,331         301,203        440,534        —     

Real estate

                  

Commercial Mortgage

                  

Owner occupied

     —           —           8,275         8,275         338,439        346,714        —     

Non-owner occupied

     8,938         1,024         44,260         54,222         258,033        312,255        —     

Residential Mortgage

                  

Secured by 1-4 family, 1st lien

     2,238         919         29,313         32,470         276,469        308,939        —     

Secured by 1-4 family, junior lien

     1,033         881         7,838         9,752         168,868        178,620        —     

Installment

     43         7         1,292         1,342         31,366        32,708        —     

Deferred loan fees and related costs

     —           —           —           —           (303     (303     —     
                                                            

Total

   $ 20,928       $ 3,835       $ 255,992       $ 280,755       $ 1,678,012      $ 1,958,767      $ —     
                                                            

Credit Quality

The Company experienced a significant deterioration in credit quality in 2009 and 2010. Problem loans and non-performing assets rose and led to significant increases to the allowance for loan losses. Due to a reduction in newly identified problem loans and continuing declines in loans outstanding, we decreased the provision for loan losses to $21.3 million in the first three months of 2011 compared to $45.6 million for the first three months of 2010.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Management regularly reviews the loan portfolio to determine whether adjustments to the allowance are necessary. The review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. In addition to the review of credit quality through ongoing credit review processes, management performs a comprehensive allowance analysis at least quarterly. This allowance includes specific allowances for individual loans; general allowance for loan pools, which factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions; and unallocated allowances predicated upon both internal and external factors.

The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is attached to loans where the borrower exhibits material negative financial trends due to company specific or systematic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “nonaccrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. The following tables provide information (in thousands) on March 31, 2011 and December 31, 2010 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator.

 

March 31, 2011    Pass      Special Mention      Substandard     Non-Performing
Loans
     Total  

Commercial & Industrial

   $ 195,583       $ 35,251       $ 24,500      $ 15,348       $ 270,682   

Construction

             

1-4 family residential construction

     15,991         1,813         6,661        8,150         32,615   

Commercial construction

     120,245         65,032         75,548        101,788         362,613   

Real estate

             

Commercial Mortgage

             

Owner occupied

     234,002         45,124         42,619        18,967         340,712   

Non-owner occupied

     193,301         45,254         31,580        19,556         289,691   

Residential Mortgage

             

Secured by 1-4 family, 1st lien

     214,782         30,738         21,558        26,577         293,655   

Secured by 1-4 family, junior lien

     152,829         5,135         12,907        7,516         178,387   

Installment

     19,604         12,195         5,864        576         38,239   

Deferred loan fees and related costs

     —           —           (147     —           (147
                                           

Total

   $ 1,146,337       $ 240,542       $ 221,090      $ 198,478       $ 1,806,447   
                                           

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2010    Pass     Special Mention      Substandard      Non-Performing
Loans
     Total  

Commercial & Industrial

   $ 225,389      $ 44,131       $ 9,684       $ 25,346       $ 304,550   

Construction

             

1-4 family residential construction

     19,080        2,207         6,190         7,273         34,750   

Commercial construction

     145,158        74,512         88,469         132,395         440,534   

Real estate

             

Commercial Mortgage

             

Owner occupied

     250,330        48,583         39,526         8,275         346,714   

Non-owner occupied

     191,080        43,226         33,689         44,260         312,255   

Residential Mortgage

             

Secured by 1-4 family, 1st lien

     226,389        32,632         20,605         29,313         308,939   

Secured by 1-4 family, junior lien

     151,221        9,916         9,645         7,838         178,620   

Installment

     17,531        10,691         3,194         1,292         32,708   

Deferred loan fees and related costs

     (303     —           —           —           (303
                                           

Total

   $ 1,225,875      $ 265,898       $ 211,002       $ 255,992       $ 1,958,767   
                                           

Modifications

A restructured loan results in a Troubled Debt Restructuring (“TDR”) when two conditions are present: 1) a borrower is experiencing financial difficulty and 2) a creditor grants a concession, such as an interest rate reduction, maturity extension and rate below market, reduction of face amount of debt, or reduction of accrued interest. As of March 31, 2011 and December 31, 2010, loans classified as TDRs were $80.3 million and $85.8 million, respectively. All of these were included in the impaired loan disclosure. Of this amount, $40.5 million was accruing and $39.8 million was non-accruing at March 31, 2011 and $63.9 million was accruing and $21.9 million was non-accruing at December 31, 2010. TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan. None of the nonaccrual TDRs were returned to accrual status during the quarter ended March 31, 2011 and year ended December 31, 2010.

NOTE H – PREMISES AND EQUIPMENT

Premises and equipment (in thousands) at March 31, 2011 and December 31, 2010 are summarized as follows.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     March 31, 2011     December 31, 2010  

Land

   $ 31,238      $ 31,238   

Buildings and improvements

     58,807        58,177   

Leasehold improvements

     3,337        3,418   

Equipment, furniture, and fixtures

     15,887        14,563   

Construction in process

     —          7   
                
     109,269        107,403   

Less accumulated depreciation and amortization

     (16,736     (13,989
                

Premises and equipment, net

   $ 92,533      $ 93,414   
                

NOTE I – SUPPLEMENTAL RETIREMENT AGREEMENTS

The Company has entered into supplemental retirement agreements with several key officers and recognizes expense each year related to these agreements based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The expense recognized during the first three months of 2011 and 2010 was $100 thousand and $148 thousand, respectively.

NOTE J – INTANGIBLE ASSETS

Intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible assets with a finite life are reviewed for impairment if conditions suggest the carrying amount is not recoverable. The gross carrying amount and accumulated amortization (in thousands) for the Company’s intangible assets is as follows.

 

     March 31, 2011      December 31, 2010  
     Carrying
Amount
     Accumulated
Amortization
     Carrying
Amount
     Accumulated
Amortization
 

Intangible assets:

           

Core deposit intangible

   $ 8,105       $ 3,389       $ 8,105       $ 3,058   

Employment contract intangibles

     1,130         957         1,130         909   

Insurance book of business intangible

     6,450         968         6,450         860   
                                   

Total intangible assets

   $ 15,685       $ 5,314       $ 15,685       $ 4,827   
                                   

The weighted-average amortization period for core deposit intangibles is 79 months, employment contract intangibles is 36 months, and insurance book of business intangible is 180 months.

NOTE K – FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS

Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on foreclosed assets is as follows.

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     March 31, 2011     March 31, 2010  

Balance at beginning of year

   $ 9,533      $ 356   

Provision for losses

     2,547        724   

Charge-offs

     (1,632     (449
                

Balance at end of quarter

   $ 10,448      $ 631   
                

Expenses (in thousands) applicable to foreclosed and repossessed assets for the three months ended March 31, 2011 and 2010 include the following.

 

     March 31, 2011      March 31, 2010  

Losses on sale of foreclosed real estate

   $ 1,135       $ 14   

Provision for losses

     2,547         724   

Operating expenses

     992         —     
                 

Total

   $ 4,674       $ 738   
                 

NOTE L – BUSINESS SEGMENT REPORTING

The Company defines it operating segments by product and consumer. The Company has two community banks, BOHR and Shore, which provide loan and deposit services throughout 56 locations in Virginia, North Carolina, and Maryland. In addition to its banking operations, the Company has three other reportable segments: Mortgage, Investment, and Insurance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”). Segment profit and loss is measured by net income prior to corporate overhead allocation. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. The following tables show certain financial information (in thousands) at March 31, 2011, December 31, 2010, and March 31, 2010 for each segment and in total.

 

     Total      Elimination     Banking      Mortgage      Investment      Insurance  

Total Assets at March 31, 2011

   $ 2,717,383       $ (243,325   $ 2,934,329       $ 16,134       $ 1,119       $ 9,126   
                                                    

Total Assets at December 31, 2010

   $ 2,900,156       $ (281,626   $ 3,146,314       $ 25,393       $ 1,111       $ 8,964   
                                                    

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three Months Ended March 31, 2011    Total     Elimination      Banking     Mortgage     Investment     Insurance  

Net interest income

   $ 18,224      $ —         $ 18,172      $ 51      $ —        $ 1   

Provision for loan losses

     21,314        —           21,314        —          —          —     
                                                 

Net interest income (loss) after provision for loan losses

     (3,090     —           (3,142     51        —          1   

Noninterest income

     2,125        —           (308     1,250        30        1,153   

Noninterest expense

     30,642        —           27,337        2,345        23        937   
                                                 

Net income (loss) before income taxes (benefit)

     (31,607     —           (30,787     (1,044     7        217   

Income tax expense (benefit)

     44        —           331        (365     2        76   
                                                 

Net income (loss)

     (31,651     —           (31,118     (679     5        141   

Net income attributable to non-controlling interest

     17        —           —          17        —          —     
                                                 

Net income (loss) attributable to Hampton Roads Bankshares, Inc.

   $ (31,668   $ —         $ (31,118   $ (696   $ 5      $ 141   
                                                 
Three Months Ended March 31, 2010 as restated    Total     Elimination      Banking     Mortgage     Investment     Insurance  

Net interest income

   $ 21,933      $ —         $ 21,845      $ 85      $ —        $ 3   

Provision for loan losses

     45,613        —           45,613        —          —          —     
                                                 

Net interest income (loss) after provision for loan losses

     (23,680     —           (23,768     85        —          3   

Noninterest income

     5,601        —           2,487        1,755        39        1,320   

Noninterest expense

     20,980        —           18,466        1,336        52        1,126   
                                                 

Net income (loss)

     (39,059     —           (39,747     504        (13     197   

Income tax expense (benefit)

     62        —           (178     176        (5     69   
                                                 

Net income (loss)

   $ (39,121   $ —         $ (39,569   $ 328      $ (8   $ 128   
                                                 

NOTE M – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company groups financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The majority of instruments fall into the Level 1 or 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:

 

Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain United States Department of the Treasury (the “Treasury”) securities that are highly liquid and are actively traded in over-the-counter markets.

 

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The aggregate fair value amounts presented below do not represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments.

 

  (a) Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. The carrying amount approximates fair value.

 

  (b) Investment Securities Available for Sale

Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Investment securities available for sale are carried at their aggregate fair value.

 

  (c) Loans Held for Sale

The carrying value of loans held for sale is a reasonable estimate of fair value since loans are expected to be sold within a short period.

 

  (d) Loans

To determine the fair values of loans other than those listed as nonaccrual, we use discounted cash flow analyses. In these analyses, we use discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality. We believe our disclosures provide fair values that are more indicative of an entry price. This technique does not contemplate an exit price. We do not record loans at fair value on a recurring basis. We record fair value adjustments to loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment. For nonaccrual loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, discounting the contractual cash flows, and analyzing market data that we may adjust due to the specific characteristics of the loan or collateral.

 

  (e) Interest Receivable and Interest Payable

The carrying amount approximates fair value.

 

  (f) Bank-Owned Life Insurance

The carrying amount approximates fair value.

 

  (g) Deposits

The fair values disclosed for demand deposits (for example, interest and noninterest demand and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (this is, their carrying values). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  (h) Borrowings

The fair value of borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. These include other borrowings, overnight funds purchased, and FHLB borrowings.

 

  (i) Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at March 31, 2011 and December 31, 2010, and as such, the related fair values have not been estimated.

The estimated fair value (in thousands) of the Company’s financial instruments at March 31, 2011 and December 31, 2010 were as follows.

 

     March 31, 2011      December 31, 2010  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Assets:

           

Cash and due from banks

   $ 18,921       $ 18,921       $ 17,726       $ 17,726   

Overnight funds sold and due from FRB

     352,070         352,070         440,844         440,844   

Interest-bearing deposits in other banks

     1,786         1,786         2,342         2,342   

Investment securities available for sale

     349,258         349,258         334,237         334,237   

Loans held for sale

     12,161         12,161         22,499         22,499   

Loans, net

     1,696,457         1,736,407         1,801,514         1,849,773   

Interest receivable

     7,540         7,540         7,278         7,278   

Bank-owned life insurance

     50,693         50,693         50,213         50,213   

Liabilities:

           

Deposits

     2,271,002         2,230,418         2,420,161         2,408,466   

FHLB borrowings

     212,559         221,924         213,353         224,262   

Other borrowings

     50,003         51,250         49,853         51,762   

Interest payable

     3,729         3,729         3,644         3,644   

Recurring Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities that were elected as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following tables reflect the fair value (in thousands) of assets and liabilities measured and recognized at fair value on a recurring basis in the consolidated balance sheets at March 31, 2011 and December 31, 2010.

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

            Fair Value Measurements at
March 31, 2011 Using
 

Description

   Assets /
Liabilities
Measured at

Fair Value
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Investment securities available for sale:

           

Agency securities

   $ 94,492       $ —         $ 94,492       $ —     

Mortgage-backed securities

     252,610         —           252,610         —     

Equity securities

     2,156         738         —           1,418   
                                   

Total investment securities available for sale

     349,258         738         347,102         1,418   

Derivative loan commitments

     256         —           —           256   

Loans held for sale

     12,161         —           12,161         —     
            Fair Value Measurements at
December 31, 2010 Using
 

Description

   Assets /
Liabilities
Measured at

Fair Value
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Investment securities available for sale:

           

Agency securities

   $ 88,702       $ —         $ 88,702       $ —     

Mortgage-backed securities

     243,348         —           243,348         —     

Equity securities

     2,187         769         —           1,418   
                                   

Total investment securities available for sale

     334,237         769         332,050         1,418   

Derivative loan commitments

     952         —           —           952   

Loans held for sale

     22,499         —           22,499         —     

The following table shows a reconciliation of fair value (in thousands) using significant unobservable inputs for the three months ended March 31, 2011.

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Activity in Fair Value Measurements
Three Months Ended March 31, 2011
 
     Investment Securities Available for Sale      Derivative
Loan
Commitments
    Loans
Held
for Sale
 
Description    Level 1     Level 2     Level 3      Level 3     Level 2  

Balance, December 31, 2010

   $ 769      $ 332,050      $ 1,418       $ 952      $ 22,499   

Unrealized losses included in:

           

Earnings

     —          —          —           —          —     

Other comprehensive (loss) gain

     (31     1,120        —           —          —     

Purchases

     —          28,887        —           —          91,562   

Sales

     —          —          —           —          (101,900

Issuances

     —          —          —           —          —     

Settlements

     —          (14,955     —           (696     —     

Transfers in

     —          —          —           —          —     

Transfers out

     —          —          —           —          —     
                                         

Balance, March 31, 2011

   $ 738      $ 347,102      $ 1,418       $ 256      $ 12,161   
                                         

The following describes the valuation techniques used to measure fair value for our assets and liabilities classified as recurring.

Investment Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products, and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions, and certain corporate, asset backed, and other securities valued using third party quoted prices in markets that are not active. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative Loan Commitments. The Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives. These are carried at fair value and are included in other assets at March 31, 2011 and December 31, 2010.

Loans Held For Sale. The Company sells loans to outside investors. Fair value of mortgage loans held for sale is estimated based on the commitments into which individual loans will be delivered. Carrying value of loans held for sale approximates fair value.

Non-recurring Basis

Certain assets, primarily impaired loans, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available. Where we do not have a current appraisal, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value.

To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and foreclosed real estate where it was deemed that an existing appraisal was outdated as to current market conditions. The matrix applies discounts to external appraisals depending on the type of real estate and age

 

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PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

of the appraisal. The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values. The discounts were based in part upon externally derived statistical data. The discounts were also based upon management’s knowledge of market conditions and prices of sales of foreclosed real estate. In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales. In the case where an appraisal is greater than two years old for collateral dependent impaired loans and foreclosed real estate, it is the Company’s policy to classify these as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. The average age of appraisals for Level 3 valuations of collateral dependent loans was 3.91 years as of March 31, 2011. Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix. To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio. The following tables represent the carrying amount (in thousands) for impaired loans and adjustments made to fair value during the respective reporting periods.

 

                      
    

Assets / Liabilities

Measured at

     Fair Value Measurements at
March 31, 2011 Using
        

Description

   Fair Value      Level 1      Level 2      Level 3      Total Losses  

Impaired loans

   $ 162,621       $ —         $ 125,920       $ 36,701       $ —     
    

Assets / Liabilities

Measured at

     Fair Value Measurements at
December 31, 2010 Using
        

Description

   Fair Value      Level 1      Level 2      Level 3      Total Losses  

Impaired loans

   $ 159,741       $ —         $ 133,861       $ 25,880       $ —     

Our nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to foreclosed real estate and repossessed assets. The amounts below represent the carrying values (in thousands) for our foreclosed real estate and repossessed assets and impairment adjustments made to fair value during the respective reporting periods.

 

                      
    

Assets / Liabilities

Measured at

     Fair Value Measurements at
March 31, 2011 Using
        

Description

   Fair Value      Level 1      Level 2      Level 3      Total Losses  

Foreclosed real estate and repossessed assets

   $ 70,790       $ —         $ 70,790       $ —         $ 3,682   
    

Assets / Liabilities

Measured at

     Fair Value Measurements  at
December 31, 2010 Using
        

Description

   Fair Value      Level 1      Level 2      Level 3      Total Losses  

Foreclosed real estate and repossessed assets

   $ 59,423       $ —         $ 59,423       $ —         $ 11,228   

The following describes the valuation techniques used to measure fair value for our nonfinancial assets and liabilities classified as nonrecurring.

Foreclosed Real Estate and Repossessed Assets. The adjustments to foreclosed real estate and repossessed assets are based primarily on appraisals of the real estate or other observable market prices. Our policy is that fair values for these assets are based on current appraisals. In most cases, we maintain current appraisals for these items. Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with the respect of the determination of fair value. As described above, we utilize a valuation matrix to assist in this process.

 

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HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE N – THE TARP CAPITAL PURCHASE PROGRAM

On December 31, 2008, and subsequent to the Company’s acquisition of Gateway Financial Holdings, Inc. (“GFH”), as part of the Treasury’s Capital Purchase Program (“TARP”), the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold 80,347 shares of Series C preferred stock, having a liquidation preference of $1,000 per share and a Warrant to purchase 53,035 shares of Common Stock at an initial exercise price of $227.25 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $80.3 million in cash.

On August 12, 2010, the Company and Treasury executed the Exchange Agreement (the “Exchange Agreement”), which provided for (i) the exchange of the 80,347 shares of Series C preferred stock for 80,347 shares of a newly-created Series C-1 preferred stock with a liquidation preference of $1,000, (ii) the conversion of the Series C-1 Preferred at a discounted conversion value of $6,500 per share into 2,089,022 shares of Common Stock at a conversion price of $10.00 per share; and (iii) the amendment of the terms of the Warrant to provide for the purchase of up to 53,035 shares of Common Stock at an exercise price of $10.00 per share for a ten-year term following the issuance of the amended warrant. These transactions took place in the third quarter of 2010.

NOTE O – NONINTEREST EXPENSE

A summary of noninterest expense (in thousands) for the three months ended March 31, 2011 and 2010 is as follows.

 

     Three Months Ended
March 31,
 
     2011      2010  

Salaries and employee benefits

   $ 12,355       $ 9,750   

FDIC insurance

     6,709         1,056   

Occupancy

     2,326         2,298   

Professional fees and consultants

     2,185         1,316   

Problem loan and repossessed assets

     1,416         613   

Data processing

     1,007         1,480   

Equipment

     806         1,091   

Amortization of intangible assets

     487         495   

Bank franchise tax

     484         510   

Telephone and postage

     419         391   

Other

     2,448         1,980   
                 

Total noninterest expense

   $ 30,642       $ 20,980   
                 

NOTE P – CONTINGENCIES

In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, or results of operations.

On November 2, 2010, the Company received from the United States Department of Justice, Criminal Division a grand jury subpoena. For a discussion of this matter, see “Risk Factors – Risks Relating to our Business – The Company has received a grand jury subpoena from the United States Department of Justice, Criminal Division, and although the Company is not a target at this time and we do not believe the Company will become a target, there can be no assurances as to the timing or the eventual outcome of the related investigation” in the 2010 Form 10-K.

 

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Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2011, the Securities and Exchange Commission informed the Company that it is conducting a formal investigation related to certain accounting matters. For a further discussion of this matter, see “Risk Factors – The formal investigation by the Securities and Exchange Commission may harm our business.”

NOTE Q – SUBSEQUENT EVENTS

We evaluate subsequent events through the date the financial statements are issued.

On March 18, 2011, the Board of Directors of the Company unanimously adopted resolutions approving an amendment to the Articles to effect a 1-for-25 reverse stock split of all outstanding shares of the Common Stock effective April 27, 2011. Refer to Note A, Basis of Presentation, in this Form 10-Q for more information.

 

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PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Where appropriate, statements in this report may contain the insights of management into known events and trends that have or may be expected to have a material effect on our operations and financial condition. The information presented may also contain certain forward-looking statements regarding future financial performance, which are not historical facts and involve various risks and uncertainties.

When or if used in this quarterly report or any Securities and Exchange Commission filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

For a discussion of the risks, uncertainties, and assumptions that could affect these statements and our future events, developments, or results, you should carefully review the risk factors contained in this Form 10-Q and in our 2010 Form 10-K, which are summarized below. Our risks include, without limitation, the following:

 

   

We incurred significant losses in 2009 and 2010 and through the first quarter of 2011 and may continue to do so in the future, and we can make no assurances as to when we will be profitable;

 

   

The determination of the appropriate balance of our allowance for loan losses is merely an estimate of the inherent risk of loss in our existing loan portfolio and, like all estimates, may prove to be incorrect. If such estimate is proven to be incorrect, and we are required to increase our allowance for loan losses, our results of operations, financial condition and the value of our Common Stock could be adversely affected;

 

   

BOHR is restricted from accepting new brokered deposits, and an inability to maintain our regulatory capital position could adversely affect our operations;

 

   

We may need to raise additional capital that may not be available to us;

 

   

The Company has restated its financial statements, which may have a future adverse effect;

 

   

The formal investigation by the Securities and Exchange Commission may harm our business;

 

   

The Company has received a grand jury subpoena from the United States Department of Justice, Criminal Division (“DOJ”) and, although the Company is not a target, there can be no assurances as to the timing or eventual outcome of the related investigation;

 

   

Current and future increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease our earnings. In addition, FDIC insurance assessments will likely increase from the prior inability to maintain a well- capitalized status, which would further decrease earnings;

 

   

We have entered into a written agreement with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions, which requires us to designate a significant amount of resources to complying with the agreement and may have a material adverse effect on our operations and the value of our securities;

 

   

We have had and may continue to have large numbers of problem loans and difficulties with our loan administration, which could increase our losses related to loans;

 

   

Governmental regulation and regulatory actions against us may impair our operations or restrict our growth;

 

   

If the value of real estate in the markets we serve were to further decline materially, a significant portion of our loan portfolio could become further under-collateralized, which could have a material adverse effect on us;

 

   

Our commercial real estate and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability;

 

   

A significant amount of our loan portfolio contains loans used to finance construction and land development and these types of loans subject our loan portfolio to a higher degree of credit risk;

 

   

Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on results of operations;

 

   

Difficult market conditions have adversely affected our industry;

 

   

We are not paying dividends on our Common Stock and currently are prevented from doing so. The failure to resume paying dividends on our Common Stock may adversely affect us;

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

   

Our ability to maintain adequate sources of funding may be negatively impacted by the current economic environment which may, among other things, impact our future ability to pay dividends or satisfy our obligations;

 

   

Our ability to maintain adequate sources of liquidity may be negatively impacted by the current economic environment which may, amount other things, impact our ability to pay dividends or satisfy our obligations;

 

   

The current economic environment may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition, which may, among other things, limit access to certain sources of funding and liquidity;

 

   

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability;

 

   

We may continue to incur losses if we are unable to successfully manage interest rate risk;

 

   

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry;

 

   

Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;

 

   

We face a variety of threats from technology based frauds and scams;

 

   

Virginia law and the provisions of our Articles of Incorporation and Bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock;

 

   

Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities;

 

   

Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors;

 

   

The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations;

 

   

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) may adversely affect our business, financial condition, and results of operations; and

 

   

The soundness of other financial institutions could adversely affect us.

Our forward-looking statements could be incorrect in light of these risks, uncertainties, and assumptions. The future events, developments, or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this quarterly report and you should not expect us to do so.

Overview

Throughout the first three months of 2011, economic conditions in the markets in which our borrowers operate remained depressed; however, the levels of loan delinquencies and defaults that we experienced began to stabilize. The Company reported a net loss for the three-month period ended March 31, 2011, primarily as a result of a significant provision for loan losses, losses on foreclosed real estate and repossessed assets, other expenses related to the resolution of problem loans, and a one-time adjustment to our FDIC insurance expense. Additionally, the Company continues to record a valuation allowance on its deferred tax assets. The Company, BOHR, and Shore are “well-capitalized” under applicable banking regulations as of March 31, 2011.

Our primary source of revenue is net interest income earned by our bank subsidiaries. Net interest income represents interest and fees earned from lending and investment activities, less the interest paid on deposits and borrowings. Net interest income may be impacted by variations in the volume and mix of interest-earning assets and interest-bearing liabilities, changes in the yields earned and the rates paid, level of non-performing interest-earning assets, and the levels of noninterest-bearing liabilities available to support earning assets. Our net interest income was negatively impacted by high levels of non-performing loans. In addition to net interest income, noninterest income is another important source of revenue. Noninterest income is derived primarily from service charges on deposits and fees earned from bank services. Fees earned from investment, mortgage, and insurance activities also represent a significant component of noninterest income. Other factors that impact net income are the provision for loan losses, and noninterest expense.

 

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PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a summary of our financial condition as of March 31, 2011 and our financial performance for the three month period then ended.

 

   

Assets were $2.7 billion. They decreased by $182.8 million or 6% during the first three months of 2011. This was primarily the result of a decrease in net loans of $105.1 million or 6% and overnight funds sold and due from the FRB of $88.8 million or 20%.

 

   

Investment securities available for sale increased $15.1 million to $349.3 million during the first three months of 2011. The increase was the result of our investing some of the funds obtained from the capital raise into pledgable interest-earning securities.

 

   

Loans decreased by $152.3 million or 8% during the three months ended March 31, 2011 as loan paydowns and charge-offs exceeded the volume of new originations. New loan activity continues to be low as a result of our tighter underwriting criteria and economic conditions in our markets.

 

   

Allowance for loan losses at March 31, 2011 decreased $47.3 million to $110.0 million from $157.3 million at December 31, 2010 as net charge-offs during the quarter exceeded the provision.

 

   

Deposits decreased $149.2 million or 6% as a result of decreases in interest-bearing demand accounts of $78.9 million, time deposits under $100 thousand of $23.0 million, and time deposits over $100 thousand of $48.8 million. Declines in deposits resulted from the Company’s strategy of reducing interest rates in an effort to improve earnings and reduce excess liquidity.

 

   

Net loss available to common shareholders for the three months ended March 31, 2011 was $31.7 million or $0.95 per common diluted share and $40.5 million or $45.74 per common diluted share for the three months ended March 31, 2010. This net loss was primarily attributable to provisions for loan losses, impairments and losses on OREO, and other expenses necessary for resolving problem loans.

 

   

Net interest income decreased $3.7 million to $18.2 million for the three months ended March 31, 2011 as compared to the same period in 2010. This was primarily the result of the $7.7 million decrease in interest income from loans due to the decline in loans outstanding, partially offset by the $3.2 million decrease in interest expense on deposits resulting from lower deposit volumes and rates.

 

   

Noninterest income for the three months ended March 31, 2011 was $2.1 million, a 62% decrease over the comparable period in 2010. This was primarily the result of increased losses on foreclosed assets and a decrease in mortgage banking revenue.

 

   

Noninterest expense was $30.6 million for the three months ended March 31, 2011, which was an increase of $9.7 million or 46% over the comparable period for 2010, primarily due to a true-up of our FDIC insurance expense and increases in salary and benefits costs related to the growth in mortgage operations.

 

   

Our effective tax rate decreased to 0.14% at March 31, 2011 compared to 0.16% at March 31, 2010. These rates are lower than the statutory rate due to the valuation allowance against the Company’s deferred tax assets.

Critical Accounting Policies

GAAP requires management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions, and estimates. Changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements and the accompanying footnotes. Actual results, in fact, could differ from those estimates. We consider our policies on allowance for loan losses, intangible assets, deferred income taxes, and estimates of fair value on financial instruments to be critical accounting policies. Refer to our 2010 Form 10-K for further discussion of these policies.

 

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PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Material Trends and Uncertainties

Currently, the U.S. economy has emerged and appears to be slowly recovering from one of its longest economic recessions in recent history. It is not clear at this time how quickly the economy will recover and whether regulatory and legislative efforts to stimulate job growth and spending will be successful. In addition, the U.S. housing market continues to struggle with excess inventory and the effects of home price depreciation.

We experienced a significant deterioration in credit quality throughout 2009 and 2010. Problem loans and non-performing assets rose and led us to significantly increase the allowance for loan losses in those years. Due to a reduction in newly identified problem loans and continuing declines in loans outstanding, we decreased the provision for loan losses to $21.3 million in the first three months of 2011 compared to $45.6 million for the first three months of 2010. In light of continued economic weakness, problem credits may continue to rise and significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs throughout 2011, which would continue to adversely impact our financial condition, our results of operations, and the value of our common stock.

Moreover, our net interest margin and net interest income declined during 2011 as a result of our reduced levels of performing assets and the related reduction of interest income. Our net interest margin decreased to 2.98% for the three months ended March 31, 2011 compared to 3.39% for the three months ended March 31, 2011, and our net interest income decreased $3.7 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.

The Company determined that a valuation allowance on its deferred tax asset should be recognized beginning December 31, 2009 because it is uncertain whether it will realize this asset. Internal Revenue Code Section 382 (“Section 382”) limitations related to the capital raised and resulting change in control for tax purposes during the third and fourth quarter of 2010 add further uncertainty to the realizability of the deferred tax assets in future periods.

On November 2, 2010, the Company received from the DOJ a grand jury subpoena to produce information principally relating to the merger of GFH into the Company on December 31, 2008 and to loans made by GFH and its wholly-owned subsidiary, Gateway Bank & Trust Co. before GFH’s merger with the Company. The DOJ has informed the Company that it is not a target of the investigation at this time, and we are fully cooperating. Although we do not believe this matter will have a material adverse affect on the Company, we can give you no assurances as to the timing or eventual outcome of this investigation.

In April 2011, the Securities and Exchange Commission informed the Company that it is conducting a formal investigation related to certain accounting matters. For a further discussion of this matter, see “Risk Factors – The formal investigation by the Securities and Exchange Commission may harm our business.”

ANALYSIS OF FINANCIAL CONDITION

Cash and Cash Equivalents. Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity. Cash and cash equivalents as of March 31, 2011 were $372.8 million compared to $460.9 million at December 31, 2010 and consisted mainly of deposits with the FRB.

Securities. Our investment portfolio consists primarily of available-for-sale U.S. Agency and mortgage-backed securities. Our available-for-sale securities are reported at estimated fair value. They are used primarily for liquidity, earnings, and asset/liability management purposes and are reviewed quarterly for possible impairment. At March 31, 2011, the estimated fair value of our available-for-sale investment securities was $349.3 million, an increase of $15.1 million or 4% from $334.2 million at December 31, 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Loan Portfolio. Our loan portfolio is comprised of commercial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans to individuals. Lending decisions are based upon an evaluation of the capacity to repay, financial strength, and credit history of the borrower, the quality and value of the collateral securing each loan, and the financial strength of guarantors. With few exceptions, personal guarantees are required on loans. Our loan portfolio decreased $152.3 million or 8% to $1.8 billion as of March 31, 2011 compared to December 31, 2010. Commercial loans decreased 11% to $270.7 million at March 31, 2011 compared with $304.6 million at December 31, 2010. Construction loans decreased 17% to $395.2 million at March 31, 2011 as compared to $475.3 million at December 31, 2010, thus lowering the concentration of construction loans to 22% of the total loan portfolio at March 31, 2011 compared with 24% at December 31, 2010. Real estate commercial mortgages decreased 4% to $630.4 million at March 31, 2011 compared to $659.0 million at December 31, 2010. Real estate residential mortgages decreased 3% to $472.0 million at March 31, 2011 as compared with $487.6 million at December 31, 2010. Installment loans to individuals increased 17% to $38.2 million at March 31, 2011 compared with $32.7 million at December 31, 2010.

Within the construction segment of the loan portfolio as of March 31, 2011, the Company has exposure on $52.2 million of loans in which interest payments are satisfied through the use of a reserve that was funded by the banks upon origination and represents a portion of the borrower’s total obligation to the banks. In the instance of commercial construction, ultimate repayment is dependent upon stabilization of the funded project; whereas, in residential development, the Company is assigned a certain percentage of each sale to retire a commensurate portion of the outstanding debt. Each interest reserve transaction is monitored by the account officer, a senior credit officer, and credit administration to verify the continuation of project viability as it relates to the remaining interest reserve and additional financial capacity of the project sponsor. In certain instances, where either or both criteria have been deemed unsatisfactory, the borrower’s access to any remaining interest reserve has been curtailed on at least a temporary basis until the Company’s special assets department has been engaged to further evaluate possible resolutions.

Although we are no longer making new loans to finance construction and land development, we have a high concentration of construction and commercial real estate loans. Construction loans have been made to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects such as the development of residential neighborhoods and commercial office parks. Risk is reduced on these loans by limiting lending for speculative building of both residential and commercial properties based upon the borrower’s history with us, financial strength, and the loan-to-value ratio of such speculative property. We generally require new and renewed variable-rate commercial loans to have interest rate floors.

Allowance for Loan Losses. The purpose of the allowance for loan losses is to provide for probable losses inherent in our loan portfolio. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations, cash flow analyses of borrowers, and risk rating of loans. In addition to the review of credit quality through ongoing credit review processes, we construct a comprehensive allowance analysis for our loan portfolio at least quarterly. This analysis includes specific allowances for individual loans, general allowance for loan pools that factor in our historical loan loss experience, loan portfolio growth and trends, economic conditions, and unallocated allowances predicated upon both internal and external factors.

The allowance for loan losses was $110.0 million or 6.09% of outstanding loans as of March 31, 2011 compared with $157.3 million or 8.03% of outstanding loans as of December 31, 2010. Pooled loan allocations decreased to $51.2 million at March 31, 2011 from $58.6 million at December 31, 2010. Allowance coverage for the non-impaired portfolio is determined using a methodology that incorporates historical loss rates and risk ratings by loan category. Loss rates are based on a three-year weighted average with recent period loss rates weighted more heavily. We then apply an adjustment factor to each loss rate based on assessments of loss trends, collateral values, and economic and business influences impacting expected losses. Specific loan allocations decreased to $52.0 million at March 31, 2011 from $89.8 million at December 31, 2010. Specific loan allocations decreased due to the $69.2 million in problem loans charged off during the quarter. Unallocated allowances decreased to $6.8 million at March 31, 2011 from $8.8 million at December 31, 2010. The following table provides a breakdown of the allowance for loan losses and other related information (in thousands) at March 31, 2011 and December 31, 2010.

 

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Table of Contents

HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

     March 31,
2011
    December 31,
2010
 

Allowance for loan losses:

    

Pooled component

   $ 51,209      $ 58,623   

Specific component

     51,954        89,838   

Unallocated component

     6,827        8,792   
                

Total

   $ 109,990      $ 157,253   
                

Impaired loans

   $ 303,222      $ 356,876   

Non-impaired loans

     1,503,225        1,601,891   
                

Total loans

   $ 1,806,447      $ 1,958,767   
                

Pooled component as % of non-impaired loans

     3.41     3.66

Specific component as % of impaired loans

     17.13     25.17

Allowance as % of loans

     6.09     8.03

Allowance as % of nonaccrual loans

     55.42     61.43

The specific allowance for loan losses necessary for impaired loans is based on a loan-by-loan analysis and varies between impaired loans largely due to the level of collateral. Additionally, pooled loan allocations vary depending on a number of assumptions and trends. As a result, the ratio of allowance for loan losses to nonaccrual loans is not sufficient for measuring the adequacy of the allowance for loan losses. The following table provides additional ratios that measure our allowance for loan losses at March 31, 2011 and December 31, 2010.

Credit losses are an inherent part of our business, and although we believe the methodologies for determining the allowance for loan losses and the current level of allowance are adequate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would negatively impact earnings. As a result, our earnings could be adversely affected if our estimate of an adequate allowance is inaccurate.

The following ratios are used by management in assessing the adequacy of the allowance for loan losses.

 

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Table of Contents

HAMPTON ROADS BANKSHARES, INC.

 

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

     March 31, 2011     December 31, 2010  

Non-performing loans for which full loss has been charged off to total loans

     2.52     2.60

Non-performing loans for which full loss has been charged off to non-performing loans

     22.99     19.91

Charge off rate for non-performing loans for which the full loss has been charged off

     58.82     48.08

Coverage ratio net of non-performing loans for which the full loss has been charged off

     72.24     76.70

Total allowance divided by total loans less non-performing loans for which the full loss has been charged off

     6.25     8.24

Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided

     24.21     36.00

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. Subsequent recoveries, if any, are credited to the allowance. Impairment is evaluated in the aggregate for smaller balance loans of similar nature and on an individual loan basis for other loans. If a loan is considered impaired, it is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Total impaired loans were $303.2 million at March 31, 2011, a decrease of $53.7 million or 15% from December 31, 2010. Of these loans, $197.7 million were on nonaccrual status at March 31, 2011. Net charge-offs were $68.6 mill